We're not really mad geniuses. We're just a little miffed

How the mighty might fall

by Amanda on April 14, 2012

I know there have already been a number of posts written about the Department of Justice filing an antitrust suit against Apple, Simon & Schuster, HarperCollins, Hachette, Penguin Group (USA) and Macmillan. Most of the posts and articles I’ve seen are all coming down on the side of Apple and the publishers. Needless to say, it’s left me shaking my head and – yes, I’ll admit it – having a bit of a laugh at them attacking Attorney General Eric Holder. But that gets into politics and I am trying not to cross that line in the sand.

When I heard the DoJ had finally filed suit, I debated whether to blog about it or not. For those of you who’ve followed my posts, you know I’ve wondered on more than one occasion why the DoJ hadn’t acted. It’s not that I particularly believe the agency model of pricing is illegal. No, I felt from the beginning there was collusion between Apple and the Big Five (later to become the Big Six when Random House finally joined the club). It was that collusion that would be in violation of anti-trust laws.

For the Justice Department’s reasoning behind why it filed the antitrust suit, I’ll refer you to the pleadings. Beginning on page 11, the history and theory of the case is laid out. In my opinion at least, a prima facie case has been made that the publishers named in the suit and Apple did conspire. Oh, they can say it was to improve the market and to prevent Amazon from taking over the industry. In fact, they do say that. But if the facts alleged in the pleading are true, then the parties did collude to fix prices and that, no matter what the motivation, is illegal.

It is important to note that the Attorney General said it is thought “consumers paid millions of dollars more for some of the most popular titles.” Greg Abbott, attorney general for Texas, in commenting about the law suit brought by Texas and 15 other states that they estimate “overcharges” paid by consumers in excess of $100 million.

From that same Shelf-Awareness article: So, in the name of antitrust, the level playing field of the past two years–agency model e-books were priced the same whether sold by Amazon, Barnes & Noble or independent bookstores–will likely revert to a situation where a near-monopoly power determines pricing and most other retailers see their already-smaller market share shrink. Although Apple and the publishers may have cooperated in ways that violated the nation’s sometimes contradictory antitrust laws, for the Justice Department to single this matter out and not address other issues in the book industry or in business in general seems misguided

Am I the only one who sees any problem with this line of thinking? If we allow publishers to fix prices for books so they are sold at the same price everywhere, what is to stop food manufacturers from doing the same? Or gas suppliers? Or any other of a myriad of producers in this country? I don’t know about you, but I tend to shop for the best buy on many items. I used to on e-books. I shop sales. But under this line of thinking, the only time there would be a discount would be when the producer/supplier approved it and then it would still have to be implemented everywhere. Sorry, but that dog just don’t hunt. At least not for me.

Now look at that last sentence. Although Apple and the publishers may have cooperated in ways that violated the nation’s sometimes contradictory antitrust laws, for the Justice Department to single this matter out and not address other issues in the book industry or in business in general seems misguided.I guess as long as the publishers and Apple were working against the big evil Amazon, they ought to be excused for any violation of the law they might have committed. WTF?!? As for not addressing other issues in the book industry, is that a can of worms any of the defendant parties really wants? If they are worried about their financial survival, they’d better pray no one comes in and forces a full audit of royalties paid and that should have been paid. I’m afraid if that happens there will be houses that fall.

But let’s move on and look at what some of the interested parties have had to say.

All the parties named as defendants in the suit have denied any wrongdoing. Apple has alleged that its launching of the iBookstore helped “break ‘Amazon’s monopolistic grip on the publishing industry.'” The only problem with this statement is that Amazon did not then, nor does it have now, “a monopolistic grip” on the industry. What Amazon had was leadership that recognized a new trend in the industry and acted on it before the legacy publishers or the big box booksellers did. That gave Amazon the lead in e-book retail and as the popularity of e-books and Amazon’s Kindle increased so did legacy publishing’s fear of change. So, instead of adapting to the new technology and evolving their business plans, they acted to try to cut Amazon off at the knees. Again, assuming the facts alleged in the Department of Justice’s pleadings are true, the defendants said as much in their talks leading up to the push for agency pricing.

John Makinson, chairman of Penguin Group, in explaining why Penguin has not settled with the DoJ said the following:

. . .We have held strongly to this view for two, and only two, reasons. The first is that we have done nothing wrong. The decisions that we took, many them of them costly and difficult, were taken by Penguin alone.

In other words, at a time when the publishing industry is struggling, these five publishers agreed to terms with Apple that would put less money in the publishing houses’ pockets, and therefore in their shareholders’ pockets, and more in the pockets of Apple. As for being taken by Penguin alone, I’m not one who holds by coincidence and the fact that agency pricing sprang up with the introduction of the iPad and the iBookstore and that these publishers all demanded the same terms from Amazon at the same time is just one coincidence too many.

The second, and equally powerful, reason for our decision to place this matter in the hands of a court is that we believed then, as we do now, that the agency model is the one that offers consumers the prospect of an open and competitive market for e-books. We understood that the shift to agency would be very costly to Penguin and its shareholders in the short-term, but we reasoned that the prevention of a monopoly in the supply of e-books had to be in the best interests, not just of Penguin, but of consumers, authors and booksellers as well.

My first issue with the above paragraph goes to the “prospect of an open and competitive market for e-books”. How does price fixing promote such and open and competitive market? I’m assuming what he thinks is that be price fixing, they are guaranteeing that markets such as Barnes & Noble, Books-a-Million and Borders will be able to remain in business. Oh, wait, Borders no longer exists. Or maybe he’s referring to Google’s agreement with independent booksellers that allows them to offer their patrons the chance to buy e-books through Google. But that’s no longer available either. Google announced in the last week or so that it was abandoning that venture because it was not viable. So how does the agency model promote “an open and competitive market” for e-books?

Makinson goes on to admit that the shift to the agency model was “very costly” to Penguin and its shareholders. But this is justified to prevent a “monopoly in the supply of e-books”. I don’t know about you, but I know of a number of other retail outlets for e-books besides Amazon that date back to long before the Kindle. Baen has offered e-books through its webscriptions site for more than ten years. Fictionwise was offering e-books as was Smashwords. So were other sites. Amazon was not the only retailer. It was, however, the only hard copy bookseller that recognized the new trend in books as being e-books and took advantage of it. Since when has being economically and commercially astute something that should be punished?

. . .The decision we took in January 2010 to move Penguin’s e-book business to agency pricing has been vindicated by the very rapid subsequent growth in the volume of e-books sold by agency publishers, and by the benefit to consumers of the steep decline in the price of e-book readers that that has resulted from this open competition. . . .

I’ll give Makinson that their growth in e-book sales has increased. But it has across the board, not just for those publishers adopting agency pricing. But the part of this comment that really floors me is how he claims the price decrease for e-book readers is because of agency pricing. Agency pricing isn’t the key to the growth of e-books , or at least not the key here. There are a number of different reasons including but not limited to, the opening of the market to indie and self published authors, kids growing up and being more comfortable with e-books over paper, etc

Let’s also not forget that almost all tech decreases in price in time. Let’s not forget that the demand for e-book readers also brought about new models and lowered pricing as well. We have a generation of teens and young adults who are much more comfortable reading on their phones and tablets and e-book readers than they are reading physical books. Frankly, based on previous comments and actions by these publishers, it wouldn’t surprise me at all if they wouldn’t dance for joy if there was a sudden ban on e-books and e-book readers, so they could go back to the old and familiar ways of doing business.

Hatchette denies any wrong-doing even as it has entered into an agreement with the government that will settle its part of the case. In a statement explaining their position, Hatchette said it adopted the agency model that was “designed to facilitate entry by a new retail competitor [Apple] and to increase the diversity and health of retail booksellers, and we took these actions knowing that Hachette itself would make less money than before the adoption of agency.”

So, they admit to formulating this new pricing model to help Apple. According to the government pleadings, Apple had an active hand in this. Whether Hatchette and the others actually believed the agency model would help increase the “diversity and health” of booksellers, I don’t know. But I can’t imagine anyone with much business sense would. Not when these same booksellers were slowly strangling themselves with out-of-date business practices. And, again, note how they admit the agency model meant less money for the publisher. Yes, I’m shaking my head again.

The Hatchette statement goes on to talk about how, before agency pricing, consumers were basically limited to Amazon for e-books and how now there are many other outlets and formats available. Obviously, Hatchette is like others who turned blind eyes to Jim Baen and his webscription program, as well as Fictionwise, Smashwords, etc. Worse, they all seem to think the public didn’t know about them. Sorry, but I’ve been buying and reading e-books for much longer than Amazon has been selling them. So there’s another dog that don’t hunt.

Harper-Collins alleges that the e-book market has exploded after the institution of the agency model and that this has given readers a wider range of formats, devices, etc., to choose from. Well, that’s true. But the agency model isn’t responsible for most of it. In fact, there are fewer formats around now than then because of the shrinking of the device market. The main formats now are EPUB and MOBI. There are others, but they aren’t major formats, no matter what the publishers want you to think. As for devices, sorry, but the iPad came without the agency model. With it or not, Apple would have updated the iPad and brought out the subsequent models. Amazon would have brought out newer kindles. While lagging behind, I believe B&N would have brought out the Nook as well, updating it along the line.

It is interesting to note that almost all of those named in the Department of Justice’s lawsuit are now showing signs of settling with the European commission that has been investigating them on similar charges. Of even more interest is the fact that the Department of Justice has apparently been working closely with the European commission, even sharing e-mails and other correspondence that originated in France. While none of this proves wrong-doing, it does present a possible common methodology and ought to have folks asking “why?”.

As for the original article that started all this, again all I can do is wonder at the author’s reasoning. First of all, I take exception to his assertion that the agency model is only a “natural” reaction to what was going on at the time: ie, it was the only way publishers and Apple could think of to battle Amazon. Sorry, but I don’t buy it. There were other options available. This was just the easiest one and the one publishers thought would hurt Amazon.

Then there’s this comment: Now, you can actually buy an indestructible book that occupies no space, can be “written” on, highlighted and dog-eared yet not worn out; and that can be transported without being transported. Such a miracle, if we were honest, is worth hundreds and would have cost thousands were someone to have offered it a decade ago.

First of all, it shows that he doesn’t know much about e-books. They were in existence a decade ago and, with certain programs, you could do much of what he is saying. But they didn’t cost anywhere near what he suggests. He is also overlooking the fact that these five publishers aren’t “selling” the e-book. They are selling a “license”. Tell me something, folks. How many of you have read the licensing agreement when you buy the e-book? What? You haven’t? That’s because you aren’t given it. So who knows what the small print might read. Remember also that these are the same publishers loading DRM into their e-books, limiting the number of devices you can have the title on at a single time and preventing you from reselling your e-book, or even lending it in many situations.

Then there is this statement: Publishers are being antiqued; and they have a right, as voluntary assemblages of human beings (shareholders, as all corporations are) to make deals to attempt to survive. This is true, but only to a point. They do not have a right to make a deal that is in violation of the law. I could say more, but I really would be going into politics then. So I’ll save that for my personal blog later this week.

While I agree with the underlying premise of much of what the author says – in other words, I don’t like seeing the government getting involved in business decisions – there are times when it is necessary. This is one. What so many of these commenters are forgetting, or choosing not to address, is the fact that these same publishers are the ones who have said they tried to slow the spread of e-books and then have increased the price of them in order to save the print side of their business. Again, this is another example of how they are trying to cling to the old and not adapt to, much less embrace, the new.

I could go on, but you get the gist. Three publishers have agreed to settle the law suit. Two others and Apple say they will fight the charges against them. Only time will tell how this plays out. However, as a reader and as a writer, I have to wonder at the reasoning of those who are so willing to overlook violations of the law simply because of the fear of a company with the foresight to recognize a new market trend.

I’ll blog some more Tuesday about the actual settlement and any other new information that has come out. In the meantime, like it or not, welcome it or rue it, this law suit has the potential of changing the face of publishing in a profound way. For me, I think good can come of it. But, as I said, only time will tell.

There’s a glimmer of hope for legacy publishing when you consider that three of the five named in the antitrust suit have agreed to settle. But the hope for the industry truly rests, in my opinion, with the small and micro houses. But then, who knows what the final outcome of all this will be.

I don’t agree with the general thrust of this article, but I think Carlie Stross does sum up my worries about Amazon’s dominance.http://www.antipope.org/charlie/blog-static/2012/04/understanding-amazons-strategy.html
Not that I think amazon’s dominance is an excuse for the Big 6 to form a cartel. As I commented at that post, ebooks have an extremely low barrier to entry which means that if amazon starts really abusing it’s market dominance then it will see much leakage to other ebook sellers

Thanks for the link. Like you, I don’t agree with the main thrust of the article. While Stross is right about what might happen, that’s a lot like the mother refusing to let her kid have a bb gun because “you might shoot your eye out”. You simply don’t take illegal action on the basis of a “what if” and that, in my opinion, is what the legacy publishers have done.

Pam, in a way, I can see it. After all, most of the authors who have been siding with legacy publishers are the ones the few who have been pushed by the publishers. Many of them, in my opinion, wouldn’t have had anything close to the “success” they’ve had if they’d been left on their own to promote, etc., the way most authors have been by these same legacy publishers.

Pricing isn’t the point, yet far too many people have fixated on it, and missed the boat in the process. Amazon’s entry into this part of the marketplace succeeded *primarily* because they found a pool of consumers and suppliers who were not effectively connected, and devised a means of bridging that divide. Amazon is to today’s marketplace what the Wells Fargo wagons were 150 years ago. The minute Amazon moves in a direction that creates space for someone else to serve those producers (us writers) and those consumers (us written-word addicts) better than Amazon is serving them, the marketplace will evolve again.

What I see as the middle-distance future of the marketplace is the rise of between several dozenand several hundred “boutique” or niche publishers, a la Baen. Like Baen (and NRP), I see the emerging publishers establishing credentials for quality and consistency in their chosen market segments, and attracting segmdnts of the consumer population.

Steve, exactly. However, until that alternative to Amazon comes along and proves it does the same thing even better, I’m not about to hurt myself by turning my back on Amazon. Not when my personal sales are more than 10 times higher on Amazon than through any other market. Not when NRP’s sales are at least that much higher than through other markets.

It is utterly fascinating to watch the ‘defend Apple at any cost’ Internet-cult mentality come into a head-on collision with anti-trust litigation. I personally suspect that the reason that so many people have been critical of the DoJ is simply because it dared to accuse Apple of wrongdoing; everything stated by these folk falls under the category of ‘rationalization.’

I think you are right in a lot of ways. I’ve had conversations with Apple fans that have left me wondering what punch bowl they drank out of so I could avoid it. But there is another aspect of it. There are those in publishing who will jump on anyone’s bandwagon who is anti-Amazon. They are quick to point out that while what Apple and the publishers did might violate the letter of the law, maybe that’s not so bad if it means preventing Amazon from becoming as evil as they know it will become in the future. Whenever I hear that argument, I want to know why they aren’t putting their ability to forecast the future to better use — like predicting the winning numbers of the lottery or something.

Articles like this and others are completely missing the point. The various business models at issue are not the problem.

Amazon approached ebooks from the viewpoint of a traditional retailer: they buy at wholesale cost and charge whatever they want. If Amazon wanted to sell at a loss to drum up business, that was their problem. There’s nothing wrong with that.

Apple approached ebooks from a different direction: they saw ebooks as no different from apps, which they sell for a 30% cut. So it was natural for Apple to allow the publishers to set their own prices and Apple just takes their 30%. Again, nothing wrong with that.

The *problem* is the contracts and limitations these companies try to foist on the author, publisher, or consumer. When I, as an author, sign on for Amazon to sell my ebook and Amazon forces me to agree to never sell my ebook for less anywhere else, that is wrong. The same when Apple gets publishers to agree to not sell their books elsewhere for cheaper than on the iBookstore. Or when publishers themselves collude and try to fix prices amongst each other or on various stores so that there are no discounts.

My hope isn’t that this lawsuit and the aftermath lowers book prices or gets me a refund on books I bought or fines one of these big companies millions of dollars. My hope is that contracts with one company that prohibit what you can do with another company are made illegal. Amazon should not be able to dictate if or how I sell my IP on other sites, and the same for Apple or anyone else.

While I, as an author and as an editor for a small press, agree with you in principle, you are missing the point of this post and others. We aren’t saying that Amazon is good and should be deified. What I said in this post, and in others before it, is that no matter what problems there may be with Amazon, that doesn’t give the legacy publishers the right to violate state and federal law in response and that is exactly what the DoJ is alleging they did.

If you want to add fuel to the fire of what ought to be addressed, how about the use of DRM because legacy publishers seem to feel that their customers are inherently dishonest? Or how about the fact these same legacy publishers don’t want to sell an e-book in the same manner that they sell a paper book. No, they want to sell a license. Or how about the fact they think the buying public is so foolish as to buy the argument that it costs basically the same to produce an e-book as it does a physical book when both are coming out at the same time? Or my all-time favorite, how about looking into what can only be called creative bookkeeping by the legacy publishers. They claim they have to rely upon sales figures from Bookscan to determine royalties. Bookscan admits it doesn’t track every sale because not every outlet — in fact, not by far — reports to them. Somehow publishers can’t figure out sales based on number of books printed, number of books shipped and number of books returned (yes, oversimplification, but still….)

So, yes, the various business models are the issue — the underlying issue of what is wrong with publishing today. However, with regard to the DoJ and the various state filings, the issue is whether or not Apple and the five publishers colluded to set e-book sales prices. Nothing more and nothing less. The rest, whether we like it or not, is for future negotiations between the parties, future investigations and, possibly, future litigation.